The Art of a Zero-Based Budget

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Intentionality is the single most important part of a budget. Intentionality is why a budget will succeed. On  the other hand, a lack of intentionality will cause a budget to fail. We learned early on that being intentional with every dollar that we made and every dollar we spent would be the driving force behind paying off our debt.

A “Zero Budget” forces this intentionality.  It means every dollar that you earn is “spent” or allocated to something.  If you make $4,000 in a month, you put every penny of that $4,000 toward something and the following month you start back over.

To break it down, the formula for a Zero-Based Budget is very simple:


Why would you want to spend all your money if you don’t have to?

Allocating all the incoming money to something does not mean it is spent and then lost; it simply means each dollar has a meaning.  Let’s say you earn $4,000 but your actual month to month expenses total $2,500.  That means you have $1,500 left over.  A zero budget does not mean to go buy a $1,500 TV (although you could) so your expenses zero out. It means you have that $1,500 allocated to certain things.  Maybe you’re saving for a house, you may have a percentage of your money go to that.  Maybe your vehicle is getting old and you’d like to get a down payment on a new car.  You can dedicate some of it to a car.

Top 6 reasons to have a “zero” budget

  1. No more living paycheck to paycheck – You look at your spending on a monthly basis, not based on the next check that comes in.  The overall budget looks at your monthly income vs expenses, not dates when a check comes in and which bills to pay at that point.
  2. Prevents overspending – At the end of the month, you know exactly what you made, what you spent, and where each dollar that was not spent on day-to-day expenses will go. You have a purpose for every penny.
  3. Makes it easier to track money – Having a plan for every dollar will help you have a better grasp of your budget and where your money is going.
  4. Get out of debt faster – When we had student debt, we almost always allocated 100% of the money we could towards our loans. We attribute this as a MAJOR reason why we got out of debt as fast as we did.
  5. Helps you become intentional with every dollar your earn – When you’re looking at your extra income and trying to decide where to go, you already are in far more control than you would be without a budget.  Becoming aware of your surplus helps you to become intentional about what you do with it.
  6. Identifies Problem Areas  – You may set up a zero budget and realize that you have no extra (or even a deficit) income. While having no extra income may not necessarily be a bad thing, it may help you decide if there are areas that you need to trim up and put the extra money towards something else.

How we Manage our Zero Budget

When “Zero” doesn’t always mean “Zero”   

At the end of each month, we zero out our checking account. But we do this knowing that we will have bills taken out of our checking account before we get paid next.  Therefore, if we had nothing in our savings account, we would over-draft our checking account.

To prevent this from happening, we keep $5,000 in there for emergencies.  Of course, we don’t consider that money available to spend, so we look at our checking account having a “$0” balance even though it has $5,000 in there.   $5,000 is the base for our checking account and at the end of each month the account will again be at $5,000, or our “$0″ baseline.

How does that look in a monthly budget?

On the first of each month, we will have $5,000 in our account.  As bills and paychecks come, that $5,000 moves up and down.  Our cash budget requires us to take out $700 dollars at the beginning of the month.  We do that on the first so our checking account drops down to $4,300.  Once a paycheck comes in the account may move up to $6,000.

At the end of the month we pay off our credit card balances 100% (we use a hybrid cash and credit card budget, read why we use mostly cash here).  At the end of the month, we distribute the extra money to the accounts we have chosen. Whether you are putting x% toward a house, or x% toward retirement, savings etc, something is done with every penny. 

Why have an emergency fund? 

One of the first things that we saved up for was a small emergency fund. We did not start out with such a large amount; we began with $2000 and made this Emergency fund a priority before we began paying off our debt.

Our account has $5000 at the beginning and end of every month. Yes, there may be a moment where the $5,000 drops a bit (such as the beginning of the month where you withdraw cash or if you have bills that come directly out of your checking account).  Depending on what time of the month your expenses roll around, you can reduce how far the $5,000 drops.  The drop technically comes from the emergency fund, but you allocate the money from a part of your income in the upcoming month, not your emergency savings.

There are several reasons we don’t worry about “using our emergency fund” this way.

  1. Almost all off our bills/expenses had scheduled due later in the month.  This allows our income to come in and increase our checking account above $5,000, before the bills/expenses are due. Rarely does our checking account dip even close to $4,000.
  2. $5,000 is not our entire emergency fund.  We keep additional money in a savings account.  This additional $5,000 is never touched and is available for use when an emergency comes up.
  3. If a major expense DID come up, you’re probably not going to have to pony up every penny in a single check that very same day.   Say a dishwasher broke, you’re most likely going to put it on a credit card, or get financing from the seller, to prevent yourself from losing a large chunk (if not all) of your emergency savings that very day, implying you are not able to afford it at the moment.
  4. If you were nervous about doing this with your emergency savings, you could work through your expenses and time your bills out so you would never drop below the amount you feel comfortable with.  Example: If you’re not comfortable dropping below $5,000 at any time, plan to “zero” your budget out at $6,000 at the end of every month so the first few days/weeks of the following months expenses keep you above the $5,000 threshold.

Where does the money that is not spent on day-to-day expenses go?

We have several “categories” in which we can allocate any extra income we may make.  These categories include, a house down payment, trip fund, saving for a new vehicle, debt, etc.  Since we have a monthly income that varies, we allocate a percentage of leftover money each month to specific things.   

For example 35% to house, 50% to retirement, 15% to vacation fund etc.  When we were actively paying off our debt and after we had a small emergency fund built up, we put 100% of our extra income towards our debt.

On the other hand, not allocating your extra income will result in the spending of your extra money and you will find yourself wondering where that money went later down the road.  The goal is to have “spent” every dollar you have so at the end of the month you are not sitting with extra income you don’t know what to do with.

Plan Ahead

To make this method really work, you have to plan ahead. Even if you don’t know exactly how much money will be coming in at the beginning of each month, you need a plan for how much you will spend.

If you know ahead of time how much money you will spend, you will know how much you can put towards savings, debt payoff, etc. If you don’t know exactly how much you will make, you can plan a percentage of that money to go towards the categories that you choose.

Either way, this method doesn’t work on a whim. It takes planning and being intentional about your hard-earned money. I can guarantee it will open your eyes and change your way of thinking so you can pay off your debt or build up your savings quickly. Give it a try!